September 20, 2017
The Bottom Line
The current account deficit narrowed slightly more than expected in Q2. Helped by historical revisions, the annual deficit fell to 2.8% of GDP.
New Zealand’s external imbalances (often the economy’s Achilles heel) are ‘off the radar’ and are expected to remain so.
There are limited implications for our views on Q2 GDP growth tomorrow. We expect a 0.7% q/q lift, although at the margin, perhaps the risks are not quite as skewed to the upside as we initially thought.
As it typically does, the unadjusted current account deficit widened in Q2 to $618 million (from a $221 million surplus in Q1). This was a smaller deficit than consensus expectations, and saw the annual deficit narrow to 2.8% of GDP from a revised 2.9% of GDP in Q1 (previously reported at 3.1%).
The seasonally adjusted current account deficit also narrowed (and by slightly more than our own expectations). It printed at $1.6 billion, down from a $2.8 billion deficit in Q1. That was driven primarily by a reduction in the goods deficit (to $0.4 billion) as export volumes rebounded strongly, and a further lift in the balance on services surplus.
The latter in fact rose to an all-time high of $1.3 billion, on the back of stronger international tourist spending. The investment income deficit also narrowed, in large part due to better returns on New Zealand’s (largely portfolio) investments abroad.
Relative to our expectations, goods import values were actually a little stronger than we thought (i.e. a larger goods deficit). However, that was more than offset by the smaller investment income deficit.
External Balance Sheet
The external balance sheet continues to look in reasonable shape (by New Zealand’s standards at least). In large part, due to valuation changes, the net international liability position grew by $1.2 billion to $154.2 billion.
However, as a share of GDP, it fell to 57.5%. It was a similar story for net external debt, which grew modestly in absolute terms, but fell to 54.3% of GDP. That figure has been tracking lower for a number of years and signals a slowly improving balance sheet (albeit from a poor starting position).
Current Account Deficit
It is encouraging that New Zealand’s current account deficit remains contained and the net external debt position is improving. Compared with history, the country’s external imbalances are far more contained then they typically tend to be at this point in the economic cycle. That’s reducing a source of economic vulnerability.
We expect the current account to remain in check over the coming years. The full impact of a strong terms of trade has yet to fully diffuse into the numbers and a moderation in credit growth is reducing pressure on the need to source offshore funding to fill a local savings void.
We are always a little reluctant to draw strong conclusions from the balance of payments figures for GDP figures (due tomorrow) as there are a number of moving parts.
While at face value higher goods imports suggest some downside risk to the contribution to GDP growth from net exports, we are a little reluctant to change our forecast as the possibility of historical revisions could see that all come out in the wash.